When To Buy With RSI – Part II

Howdy!

This is Enrique here, and once again, I am back with the latest edition of the STP Algo Trader User Blog.

Again, the idea with this User Blog is to take active users of our algorithmic trading software – Signal Trader Pro – and share our experiences using the system to MAKE MONEY.

The reality is that many of the techniques we use with the system are the same trading techniques that can be used on any good trading system or process.

The goal of our insights isn’t just about Signal Trader Pro, but about ALL of your trading.

Last week, we published an in-depth discussion about using the relative strength index or "RSI" as our key ENTRY SIGNAL for trade recommendations.

The core of the system is that we look for "winning" stocks (well-defined uptrend) that are also "winning" companies (great operating momentum across revenue, cash flow (EBITDA), and earnings (EPS)) and then look to buy them when the stock stumbles.

Specifically, when they trade BELOW an RSI of 30 and then back above that level.

Trading below that level indicates a certain amount of investor panic in the shares. Trading back above suggests that the panic has begun to subside, and the fundamentals (the “winning”) will begin to be the dominant influence on the shares.

At the end of last week's note, we also discussed the WATCHLIST.

This is where we highlight companies that score highly on our "15" point scoring system (scores above "12") and that have traded below an RSI of 30 but are still trading below that level.

These stocks will soon trigger an ENTRY SIGNAL, as within a few days or weeks, the RSI inevitably goes back above 30.

We briefly discussed when we would buy stocks still trading below an RSI of 30, and we wanted to expand on that conversation in today's note.

To reshare our conclusion, we would very SELDOM buy before it goes back above an RSI of 30.

What are the circumstances for buying before that level?

Most of it has to do with certainty.

If we think a stock has a high certainty defined by excellent fundamentals and a successful history of RSI trading, we are more inclined to buy below the 30 level.

We do this because the highest quality companies may only be below that 30 level for a very short period. They may also "thrust" out of it quickly, and a good portion of the returns may be realized in that initial movement back above 30.

Here is an example of a recent successful position from Signal Trader Pro – Broadcom Inc. (AVGO).

Here are the statistics from our system on the position:

This was an incredible trade! It generated a 43% return in just 35 days.

Below is the stock chart along with the RSI at the bottom…

We have circled the period where the stock went below an RSI of 30 in green.

On a closing basis, it stayed there just two days.

With a “15” score like AVGO and the high-quality nature of the company, we think it would have been reasonable to buy at that point.

If you had bought it at the close on the first day it went below a 30 RSI, you would have owned it at $154.01 a share. It would trade lower the next few days with an $138 intra-day price two days later, but it was higher afterward.

Had you waited to buy it on the day AFTER the return above 30 RSI, you would have purchased the stock at a closing price of $156.03 and not left too much on the table.

In this case, you may have spared yourself some intraday volatility but not added much to your total return.

A more common situation is what we saw with CrowdStrike Holdings, Inc. (CWRD) a year ago.

Here is the snapshot from Signal Trader Pro…

This was also a hugely successful position! It generated a +46.7% return over 103 days.

Here is a chart of the stock price and RSI…

In this situation, CRWD breached a 30 RSI on July 19, 2024, and had you bought at the close that day, you would have owned the stock at $304.96 a share.

Over the next month, the stock would trade as low as $217 a share. That is an almost -30% loss.

Our system triggered an ENTRY SIGNAL when the RSI went back above 30 on August 9, and our readers could have executed the trade at $240.90 per share.

That price is 20% better than the price on the first day it breached the RSI 30 level.

These are two distinct examples of how a high-quality stock has traded around the RSI levels.

Both, however, support the idea that waiting until a stock trades back above the 30 level is best and triggers an ENTRY SIGNAL.

In the worst-case scenario, you leave a little on the table. In the best-case scenario, you save yourself a lot of stress and get a much better price!